Laws of successful trading – 4 – the law of diversification



Hello and welcome to this video.


In this video series we are going to talk about how to use the laws of successful trading to improve your trading results in the next 12 months.


In the last video we have talked about a law that can improve system predictability in the long run.


In this video we are going to talk about the law of diversification.


Have you ever heard that it is a good idea not to put all your eggs in one basket?


In trading that is called a portfolio. 


Trading different financial instruments can save you from disaster.


Even if one currency pair is going crazy, other currency pairs might save your account.


When I heard the term portfolio in the past, I thought people are talking about something like a handpicked collection of stocks, wines or music.


People try to find stocks that promise an above average performance and investment magazines introduce management insights for promising companies.


When it comes to Forex trading a portfolio is simply a number of different currency pairs.


I don’t have any emotional reasons why I pick this or that currency pair, at least most of the time.


I don’t like to trade currency pairs with bad conditions like a spread that is too high, that is true.


But I don’t buy or sell something because it is outstanding popular.


Basically the most important thing is liquidity, because liquidity causes the movement that is required for profits.


If a currency pair is liquid and the spread is moderate, I will start with the backtesting process.


Some of my systems run with more than 25 currency pairs at the same time, like the Golden Goose Brexit system.


You can find the table with the current statements if you google the system, it trades 24/7 since the day of the first Brexit votum in 2016.


At the time of this recording it made 9643 automated trades.


The average win is $25, the average trade length is 17 days.


For the currency pair GBPUSD it made 428  trades, but only one single trade was made for the currency pair AUDNZD.


The monthly expectancy is 2.45 percent, the biggest draw down was 77.41 percent and it happened on May the 8th in 2019.


This is the only day within 3 years, 7 months and 8 days where the system was in danger.


We are talking about over 1300 days and on exactly one day we had an outstanding draw down.


The current absolute gain is 185.4 percent.


Do you think that it would be possible to get this kind of data with a handful of trades in only one currency pair?


The Brexit system is what I use as a base for my system development, because it runs rock solid and it uses diversification.


It is trading day and night on 27 currency pairs and that is why I think that diversification is so important.


You can’t trade 27 currency pairs as a human, but this little trading system can do it and it runs on a virtual machine with only 2 Gigabytes of RAM.


It collects valuable data and if I need to find out what works and why it works, I can get the data for each of these 9643 trades.


Without diversification that would be impossible and if you don’t have that kind of statistics, I would suggest to use diversification to collect this kind of data as soon as possible.


Because this is what is what we need to calculate probabilities and make good decisions to improve our trading results.


In this video we have talked about the law of diversification.


In the next video we will talk about the law of consistency.